NOTES THE FUTURE OF BUSINESS METHOD SOFTWARE PATENTS IN THE INTERNATIONAL INTELLECTUAL PROPERTY SYSTEM

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1 NOTES THE FUTURE OF BUSINESS METHOD SOFTWARE PATENTS IN THE INTERNATIONAL INTELLECTUAL PROPERTY SYSTEM JASON TAKETA * I. INTRODUCTION When the Federal Circuit Court of Appeals decided State Street Bank & Trust Co. v. Signature Financial Group, Inc. 1 in 1998, many commentators hailed it as a victory for computer-based technology firms and Internet-based businesses. 2 The barriers to patenting computer-based business models had fallen, as the case explicitly struck down the longstanding business method exception and severely limited the mathematical algorithm exception in U.S. patent law. 3 Generally, the business method exception held that a method of doing business was an unpatentable subject matter. The mathematical algorithm exception generally prevented computer programs that consisted of a mathematical algorithm from being patented. * Class of 2002, University of Southern California Law School; B.A. 1998, University of Southern California. The author would like to thank Professor Daniel Klerman for advising on this Note. In his Intellectual Property class, Professor Klerman called on the author to remark on the normative values of business method patents and unknowingly provided the inspiration for this Note. The author would also like to thank Professor Paul Edward Geller for introducing him to the intricate world of international intellectual property F.3d 1368 (Fed. Cir. 1998). 2. See, e.g., John M. Carson & Eric M. Nelson, Legal Victory for Electronic Commerce Companies: State Street Bank & Trust v. Signature Financial Group Signals Fall of Last Barrier to Internet Software Patents, 21 T. JEFFERSON L. REV. 193, 198 (1999). 3. See State St. Bank & Trust Co., 149 F.3d at

2 944 SOUTHERN CALIFORNIA LAW REVIEW [Vol. 75:943 Hence, today s computer-based technology firms and Internet-based businesses can, in theory, seek even stronger intellectual property protections for their computer-based innovations. In fact, since the State Street decision, new inventors in the e-commerce age have been rushing to the United States Patent and Trademark Office ( PTO ) to obtain patents for their business-related inventions. Patents have already issued for processes such as Internet search methods, delivery of postage, Internet server access control and monitoring systems, ele ctronic shopping carts, Internet auctions, and Internet keyword search services. 4 As e-commerce companies raced to the PTO, many American commentators have questioned the wisdom of allowing computer-based business methods to be patented. 5 The ramifications of the new American category of patents, however, have not been localized to the United States. In fact, American entrepreneurs have moved overseas in an attempt to find some patent protection for their computer-based business methods in foreign territories as well. This trend has sparked controversy and discussion overseas by compelling foreign countries to consider to what extent their domestic patent laws should protect computer-implemented business methods or whether their laws should protect such methods at all. 6 Currently, many European countries explicitly deny patent protection to business methods or business models. 7 Because the United States is a major economic entity in the world economy, many questions inevitably arise as to what consequences will result from its recognition of patentable business methods in the over-arching international intellectual property system. Specifically, it is unclear how business methods patents will be 4. See William D. Wiese, Death of a Myth: The Patenting of Internet Business Models After State Street Bank, 4 MARQ. INTELL. P ROP. L. REV. 17, (2000). 5. See generally Rochelle Cooper Dreyfuss, Are Business Method Patents Bad For Business?, 16 SANTA CLARA COMPUTER & HIGH TECH. L.J. 263, 267 (2000) (seeing difficulties concerning the quality of business patents issuing and the recognition of exclusivity in competitive processes); Leo J. Raskind, The State Street Bank Decision: The Bad Business of Unlimited Patent Protection for Methods of Doing Business, 10 FORDHAM INTELL. PROP. MEDIA & ENT. L.J. 61, 64 (1999) (arguing that business method patents have the ability to hamper competition in the free market and thus should receive stronger scrutiny than other patentable innovations); John R. Thomas, The Patenting of the Liberal Professions, 40 B.C. L. REV. 1139, 1141 (1999) (arguing that business methods should not be characterized as technological in nature and therefore should not truly receive patent protection); Francisc Marius Keeley-Domokos, State Street Bank & Trust Co. v. Signature Financial Group, Inc., 14 BERKELEY TECH. L.J. 153, (1999) (arguing that a traditional cost-benefit analysis used to justify the limited monopoly granted under the patent system does not support the granting of patents to methods of doing business). 6. See discussion infra Part III.B. 7. See infra note 116 and accompanying text.

3 2002] BUSINESS METHOD SOFTWARE PATENTS 945 viewed in the context of the large multilateral treaties that govern many aspects of international intellectual property. This Note will attempt to address some of the issues that will arise in the international intellectual property system with respect to computerbased business methods. 8 First, in Part II, this Note will briefly examine the history of America s domestic patent statutes and precedents that once denied patent protection to such devices. Specifically, Part II will examine the legal arguments that formed the key limiting concepts that barred patent protection for computer-based business models. Part II will then demonstrate how the State Street decision affected these concepts and opened the door to patent protection. Finally, Part II will discuss the immediate effects of the decision both in the United States and abroad. Second, in Part III, this Note will demonstrate that the current international intellectual property system will be unlikely to protect computer-based business methods, thus leaving a major incongruity in the international system. Part III will also demonstrate how such incongruities may detrimentally affect the international intellectual property system by examining how current American patent laws could adversely impact a foreign e-commerce company. Finally, this Part will argue that the international intellectual property system should attempt to remedy the current situation. Part IV will examine the possible forms of protection available to business method software in the international intellectual property system. Specifically, this Part will argue that the international inte llectual property system should not protect computer-based business methods through patent or patent-like systems. Rather, the international system should provide protection only to the extent that it adequately remedies the root problem of under-protection that inventors of such innovations face. Finally, this Note will argue that the best form of protection should be similar to proposed forms of protection for other new patent regimes around the world. II. THE HISTORY AND EFFECTS OF THE STATE STREET DECISION In order to comprehend the ramifications of protectable computerbased business models in the international system, it is important to understand how such models became legitimate objects of patent 8. Of course, many other issues are bound to arise with this topic, and I can only hope that this Note addresses the most glaring issues at hand. I am confident, however, that other professionals who have dedicated their life s work to international intellectual property will flush out and grapple with the issues upon which this Note only lightly touches.

4 946 SOUTHERN CALIFORNIA LAW REVIEW [Vol. 75:943 protection. Furthermore, it is important to note the immediate domestic and international effects of the State Street decision as well as any trends that such effects may signal. A. THE UNITED STATES PATENT SYSTEM The patent system in the United States springs from a specific grant of power given to Congress in the Constitution. Article I, Section 8 of the Constitution grants Congress the explicit power to promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries. 9 Congress implemented this power by creating a patent protection system codified in Title 35 of the United States Code. 10 Congress has enacted several versions of the Patent Act, the most recent major revision being the Patent Act of Under the current patent system, any invention or patent application 12 must pass the requirements of novelty, 13 nonobviousness, 14 utility, 15 and enablement. 16 The Patent Act also provides a threshold inquiry as to whether the invention or patent application claims certain subject matters that are expressly unpatentable. The current act enumerates four general 9. U.S. CONST. art. I, 8, cl See Patent Act, 35 U.S.C (1994). 11. See Patent Act of July 19, 1952, ch. 950, 66 Stat. 792, Pub. L (codified at 35 U.S.C (1994)). 12. An inventor who wishes to obtain a patent for an invention in the United States must apply for a patent with the Patent and Trademark Office. See ROBERT P. MERGES, PETER S. MENELL & MARK A. LEMLEY, INTELLECTUAL PROPERTY IN THE NEW TECHNOLOGICAL AGE 131 (2d ed. 2000). During the application period known as prosecution a patent examiner at the PTO evaluates the application and, after numerous negotiations, decide to reject or accept the application based upon a number of sections of the Patent Act. See id. at 134. If the application is accepted, a patent is granted to the inventor, and all the rights of a patent holder under the Patent Act are bestowed upon the inventor. See id. at The U.S. courts only become involved in the patent process when other inventors or those accused of infringing the patent challenge the validity of the original patent. See id. at 136. Third parties may also challenge the patent through the PTO by a process known as patent reexamination if a substantial new basis for questioning the patentability of the invention arises after issuance of the patent. See id. at The invention may not receive a patent if the invention was known or used by others in this country, or patented or described in a printed publication in this or a foreign country before the date of invention by the patent applicant. 35 U.S.C. 102(a). This requirement is commonly called the novelty requirement. See id. 14. The invention may not receive a patent if a person skilled in the art to which the subject matter pertains would deem the innovation of the invention to be obvious. Id This requirement has been labeled the nonobvious requirement. Id. 15. See id See id. 112.

5 2002] BUSINESS METHOD SOFTWARE PATENTS 947 categories of patentable subject matter: process, machine, manufacture, or composition of matter. 17 Historically, the Patent Act did not delineate any specific statutory limitations on patentable subject matter besides those enumerated categories. Courts, however, began to craft their own judicial exceptions to patentability from very early on. In 1874, the Supreme Court articulated the fundamental rule that abstract ideas are not patentable; rather, only new devices that make such ideas practical and useful are. 18 Furthermore, the Court endorsed the rule that laws of nature and physical phenomena are not patentable subject matter. 19 For example, in Diamond v. Chakrabarty, the Court stated, Einstein could not patent his celebrated law that E=mc²; nor could Newton have patented the law of gravity. Such discoveries are manifestations of... nature, free to all men and reserved exclusively to none. 20 Lower courts have adopted other limiting doctrines dealing with more specific exceptions to the subject matter of patents. 21 Thus, although the Supreme Court has construed 101 to include anything under the sun that is made by man, the Court has noted that 101 does indeed have some boundaries created by the judicial evolutionary process. 22 B. THE JUDICIAL EXCEPTIONS BARRING COMPUTER-BASED BUSINESS METHODS FROM PATENT PROTECTION The judicially crafted bars to patent protection for computer-based business methods came in two forms: the business method exception and the mathematical algorithm exception. The business method exception worked to block process patents that claimed a general process or method of conducting business while the mathematical algorithm exception worked to deny protection to computer programs. 1. The Business Method Exception The business method exception was established in 1908, when the Second Circuit Court of Appeals decided Hotel Security Checking Co. v. 17. Id See Rubber Tip Pencil Co. v. Howard, 87 U.S. (20 Wall.) 498, 507 (1874). 19. See Diamond v. Chakrabarty, 447 U.S. 303, 309 (1980). 20. Id. (quoting Funk Bros. Seed Co. v. Kalo Inoculant Co., 333 U.S. 127, 130 (1948)). 21. See discussion infra Part II.B. 22. Chakrabarty, 447 U.S. at 309 (quoting S. REP. NO , at 5 (1952); H.R. REP. NO , at 6 (1952)).

6 948 SOUTHERN CALIFORNIA LAW REVIEW [Vol. 75:943 Lorraine Co. 23 In striking down a patent grant for a system of financial accounting designed to prevent fraud by restaurant waiters and cashiers, the court stated that a system of transacting business disconnected from the means for carrying out the system is not, within the most liberal interpretation of the term, an art. 24 The court, however, did not provide any further justifications for the business method exception other than its declaration that transacting business was not an art. 25 Instead, the court implicitly tied this exception to the abstract idea exception by stating, No mere abstraction, no idea, however brilliant, can be the subject of a patent irrespective of the means designed to give it effect. 26 In further clouding the issue of the business method exception, the court seemingly rested its analysis on the grounds of novelty rather than the business method exception. 27 Another notable case endorsing the business method exception was Loew s Drive-In Theatres, Inc. v. Park-In Theatres, Inc. 28 The patent at issue claimed a system for arranging and designing a drive-in movie theater parking lot, such that people sitting in their cars could view the screen without obstruction from other cars parked closer to the screen or moving in and out of the lot. 29 At the outset of the discussion, the court noted that a system of transacting business was patentable not on its own, but rather only in conjunction with the means of making the system practically useful. 30 The court, however, also rested its ruling on the more concrete element of novelty in striking down the patent. 31 The court s actions in Loew s and Hotel Security, while seemingly sound in legal reasoning, would form the basis of a major argument against the business method exception. Commentators and judges alike would F. 467 (2d Cir. 1908). 24. Id. at 469. Note that the statute at the time of the decision listed the categories of patentable subject matter as art, machine, manufacture, or composition of matter. Id. The term process was substituted for the term art in U.S.C. 101 (1994). 25. See Hotel Security Checking Co., 160 F. at Id. (quoting Fowler v. City of New York, 121 F. 747, 748 (2d Cir. 1903)). 27. It is unnecessary to multiply authorities as we are convinced that there is no patentable novelty either in the physical means employed or in the method described and claimed.... Id. at F.2d 547 (1st Cir. 1949). 29. See id. at See id. at See id. [T]here is nothing inventive in adapting the old arcuate arrangement of seats in a theatre to automobiles in a parking lot as the means to achieve horizontal pointing. Id.

7 2002] BUSINESS METHOD SOFTWARE PATENTS 949 argue that the exception had no teeth because the courts endorsing it never employed it to strike down a patent The Mathematical Algorithm Exception By most accounts, three Supreme Court cases commonly known as the Supreme Court trilogy established the mathematical algorithm exception. 33 Like the business method exception, the doctrine has its roots in the abstract idea exception in the form of three basic princ iples. First, a patent claim that sought protection for a mathematical formula in the abstract was not valid. 34 Second, claims that involved algorithms could be patented only if the algorithm had been reduced to some useful application. 35 Thus, if a claim containing a mathematical formula implemented or applied that formula in a process that the patent laws were designed to protect, the claim satisfied 101 for patentable subject matter. 36 Third, the useful application of the algorithm had to work to physically transform or reduce an article to a different state or thing. 37 Consequently, all software patents that incorporated mathematical algorithms had to satisfy the transformation inquiry. 38 In practice, however, courts would instead apply the Freeman-Walter- Abele test in order to determine whether the claimed subject matter was an unpatentable abstract idea. The test has been articulated as follows: First, the claim is analyzed to determine whether a mathematical algorithm is directly or indirectly recited. Next, if a mathematical algorithm is found, the claim as a whole is further analyzed to determine whether the algorithm is applied in any manner to physical elements or process steps, and, if it is, it passes muster under See, e.g., In re Schrader 22 F.3d 290, 298 (Fed. Cir. 1994) (Newman, J., dissenting); State St. Bank & Trust Co. v. Signature Fin. Group, Inc., 149 F.3d 1368, 1375 (Fed. Cir. 1998). 33. See, e.g., State St. Bank & Trust Co. v. Signature Fin. Group, Inc., 927 F. Supp. 502, 508 (D. Mass. 1996) (stating that Gottschalk v. Benson, 409 U.S. 63 (1972), Parker v. Flook, 437 U.S. 584 (1978), and Diamond v. Diehr, 450 U.S. 175 (1981) discussed the scope of patent protection that ought to be afforded computer software), rev d, 149 F.3d 1368 (Fed. Cir. 1998). 34. See Diamond v. Diehr, 450 U.S. 175, 191 (1981). 35. See In re Alappat, 33 F.3d 1526, 1543 (Fed. Cir. 1994). 36. See id. 37. See Diehr, 450 U.S. at See Claus D. Melarti, Note, State Street Bank & Trust Co. v. Signature Financial Group, Inc.: Ought the Mathematical Algorithm and Business Method Exceptions Return to Business As Usual?, 6 J. INTELL. PROP. L. 359, 368 (1999). 39. State St. Bank & Trust Co. v. Signature Fin. Group, Inc., 149 F.3d 1368, 1374 (Fed. Cir. 1998) (quoting In re Pardo, 684 F.2d 912, 915 (C.C.P.A. 1982)).

8 950 SOUTHERN CALIFORNIA LAW REVIEW [Vol. 75:943 Therefore, in order to invalidate a patent under the mathematical algorithm exception, one had to demonstrate that the algorithms were merely abstract ideas constituting disembodied concepts or truths that are not useful. 40 In other words, the usefulness of an algorithm s claim determined the validity of the patent. Furthermore, the concept of usefulness seemed limited to processes affecting the natural, physical world, and excluded more intangible worlds, such as numbers or prices. The Freeman-Walter-Abele test resulted in courts upholding process patents that employed mathematical algorithms in a technical field, but striking down process patents that utilized algorithms in more intangible, business-related fields. 41 For example, the court in In re Alappat upheld the patent claim for a machine that employed an algorithm to transform an electric input signal into a smooth waveform displayed on a monitor. 42 The court held that the mathematical formula in the invention met the transformation requirement because it transformed electric data into a visual waveform display. 43 By comparison, the court in In re Schrader held that a patented method claiming an algorithm that transformed bid prices into new groupings of bid prices failed the test because number conversion did not represent a physical transformation. 44 Because business method computer programs likely involved the transformation of financial data into other useful financial data, such programs were unlikely to gain protection under pre-state Street analysis, regardless of whether the patent claimed the overall business method. 3. Initial Effects of the Exceptions on Computer-Based Business Methods Although neither exception was a dominant force in the denial of patents by courts, their presence and force in the patent law doctrine possibly prevented inventors from even attempting to seek a patent for a computer-based business method. Because the business method exception only allowed an inventor to claim the device for implementing a business 40. Id. at See, e.g., In re Alappat, 33 F.3d 1526, 1544 (holding that an algorithm that transformed electric input signals into a smooth waveform display on a monitor was useful, and hence, patentable); Arrhythmia Research Tech., Inc. v. Corazonix Corp., 958 F.2d 1053, (Fed. Cir. 1992) (holding that a device that converted electrocardiograph signals using mathematical calculations into output information about heart activity was a useful and, hence, patentable application); In re Schrader, 22 F.3d 290, 291, 294 (Fed. Cir. 1994) (denying patent because method of recording and regrouping bid prices for land so as to maximize seller revenue did not involve any physical transformation). 42. Alappat, 33 F.3d at See id. 44. See Schrader, 22 F.3d at 294.

9 2002] BUSINESS METHOD SOFTWARE PATENTS 951 method, the focus turned to the patentability of the implementing device. 45 If that device included a computer using a computer program, the device risked invalidation under the mathematical algorithm exception if the algorithm at issue did not affect some physical process. A further deterrent for inventors seeking to patent their computer-based business models was the PTO s own policies regarding business methods. As recently as 1994, the PTO s Manual of Patent Examining Procedure instructed its examiners that, [t]hough seemingly within the category of a process or method, a method of doing business can be rejected as not being within the statutory classes. 46 Thus, an inventor whose computer program could be classified as both a business model and a mathematical algorithm would be wary about the initial outlay of money and resources in the long and often arduous patent prosecution system if the likelihood of gaining patent protection was highly speculative. In fact, inventors may have decided that the wiser path to patent protection was through other avenues, such as trade secret law. Thus, the lack of previous patent applications for business-related software may have resulted more from the inventors own self-imposed fear of financial loss than from the actual operation of patent law. C. THE STATE STREET DECISION In the 1998 decision of State Street Bank & Trust Co. v. Signature Financial Group, Inc., 47 the Federal Circuit abolished the business method exception and limited the mathematical algorithm exception to a status approaching complete irrelevance in modern patent law. 48 The patent in the State Street case involved a computer-based system that allowed a financial administrator to monitor and record the flow of financial information, and then make calculations to maintain a financial services configuration, termed the Hub and Spoke system. 49 The district court ruled in a summary judgment that the patent was invalid because it targeted nonstatutory subject matter, as it claimed both a business method and a mathematical algorithm See Loew s Drive-In Theatres, Inc. v. Park-In Theatres, Inc., 174 F.2d 547, 552 (1st Cir. 1949). 46. MANUAL OF PATENT EXAMINING PROCEDURE (a) (5th ed. 1994) F.3d 1368 (Fed. Cir. 1998). 48. See Melarti, supra note 38, at See State St. Bank & Trust Co., 149 F.3d at See State St. Bank & Trust Co. v. Signature Fin. Group, Inc., 927 F. Supp. 502, 516 (D. Mass. 1996), rev d, 149 F.3d 1368 (Fed. Cir. 1998).

10 952 SOUTHERN CALIFORNIA LAW REVIEW [Vol. 75:943 On appeal, the Federal Circuit reversed the lower court s decision and held that the patent did claim proper subject matter. 51 In deciding the case, the court boldly eliminated the business method exception by stating: We take this opportunity to lay this ill-conceived exception to rest. Since its inception, the business method exception has merely represented the application of some general, but no longer applicable legal principle.... Since the 1952 Patent Act, business methods have been, and should have been, subject to the same legal requirements for patentability as applied to any other process or method. 52 The court reasoned at the outset that the language of 101 indicated Congress intent not to place restrictions on subject matter patentability beyond those enumerated in Thus, the business method exception was an improper expansion of the statute beyond the original legislative intent. 54 The court also reasoned that the business method exception should have been discarded as being error-prone, obsolete, and redundant. 55 The court left little room for doubt or argument in its language as to the future of the business method exception. As one commentator noted, [w]hat is clear and unqualified is that business methods are now statutory subject matter in full parity with other innovative activity. 56 The court also found that the patent properly claimed a mathematical algorithm. The court ruled as an initial matter that the transformation of data, representing discrete dollar amounts, by a machine through a series of mathematical calculations into a final share price, constitutes a practical application of a mathematical algorithm... because it produces a useful, concrete and tangible result. 57 Furthermore, the mere fact that a claimed invention involves inputting numbers, calculating numbers, outputting numbers, and storing numbers, in and of itself, would not render it nonstatutory subject matter. 58 In so ruling, the court explicitly opened the door for business software patents by requiring that any algorithms contained in the programs need only produce a useful result that could be expressed in numbers, such as price, profit, percentage, cost, or loss See State St. Bank & Trust Co., 149 F.3d at Id. at See id. at See id. 55. See id. at 1375 n.10 (citing In re Schrader, 22 F.3d 290, 298 (Fed. Cir. 1994) (Newman, J., dissenting)). 56. Raskind, supra note 5, at State St. Bank & Trust Co., 149 F.3d at Id. at Id. at 1375.

11 2002] BUSINESS METHOD SOFTWARE PATENTS 953 Finally, the court drove the last nail into [the Freeman-Walter-Abele test s] coffin 60 by stating that the test had little, if any, applicability 61 in determining patentable subject matter. The doctrinal results of the State Street case bode well for businesses and the makers of business method software. With the mathematical algorithm exception all but extinct, inventors may now patent computer programs that employ algorithms to produce useful, numerical information such as prices, profits, percentages of losses, and costs. Furthermore, with the business method exception obliterated, inventors may patent the entire business process carried out by the computer program not just the software that implements the process. Consequently, the patent holder has a greater scope of protection, and thus a greater monopoly in that field. D. STATE STREET: A MOVE TOWARDS PATENTING EVERYTHING UNDER THE SUN? In retrospect, the State Street holding should not have been very surprising. The decision and its practical effects are consistent with a trend in international intellectual property systems towards granting patent or patent-like protection to previously unpatentable subject matter. For example, the most recent large multilateral international intellectual property convention has provided specific protection for subject matters that had originally lacked patent or copyright protection, such as layout designs of integrated circuits and plant varieties. 62 Evidence of a shift toward a more inclusive patent system could also be found in the United States well before the State Street decision. For instance, in 1994, Judge Newman foreshadowed the State Street decision in his sharply critical dissent to the majority analysis of In re Schrader. 63 Two years later, the PTO itself echoed elements of the shifting trends by reversing its pos ition on the business method exception. The 1996 Examination Guidelines for Computer-Related Inventions stated that [o]ffice personnel have had difficulty in properly treating claims directed 60. Melarti, supra note 38, at State St. Bank & Trust Co., 149 F.3d at See J.H. Reichman, Charting the Collapse of the Patent-Copyright Dichotomy: Premises for a Restructured International Intellectual Property System, 13 CARDOZO ARTS & ENT. L.J. 475, (1995). 63. See In re Schrader, 22 F.3d 290, (Fed. Cir. 1994) (disagreeing with view of subject matter as nonstatutory in terms of 35 U.S.C. 101).

12 954 SOUTHERN CALIFORNIA LAW REVIEW [Vol. 75:943 to methods of doing business 64 and that, therefore, such [c]laims should not be categorized as methods of doing business [but instead] should be treated like any other process claims, pursuant to [the] Guidelines. 65 Although the examination guidelines did not have the force of law, the implications of that new policy seemed to be indicative of a larger trend in American patent law at that time a trend away from an exclusionary approach and toward a more protectionist and inclusive approach. 66 Therefore, the State Street case may have been the culmination of that trend towards increased patent protection for innovative processes regardless of the method used to implement that process. In essence, State Street may have signaled a move towards a patent system that will potentially protect anything under the sun that is made by man. 67 E. THE EFFECTS OF STATE STREET: A DECISION HEARD AROUND THE WORLD? Almost four years have passed since the State Street decision, and some of the effects can be seen today in the United States and around the world. Unfortunately, empirical data is not yet available on the economic effects of business method patents because of their only recent acceptance in the American patent system. 68 Other, more noticeable or traceable effects, however, have surfaced in both the domestic and foreign arenas. 1. Domestic Effects and Reactions First, the number of patent applications in the United States dealing with computer-implemented business methods have increased in the last three years. 69 In 1999, the PTO tracked a strong growth in computer-based 64. Examin ation Guidelines for Computer-Related Inventions, 61 Fed. Reg. 7478, 7479 (Feb. 28, 1996). 65. Id. 66. See id. 67. Diamond v. Chakrabarty, 447 U.S. 303, 309 (1980) (quoting S. REP. NO , at 5 (1952); H.R. REP. NO , at 6 (1952)). 68. See Raskind, supra note 5, at See United States Patent and Trademark Office, White Paper: Automated Financial or Management Data Processing Methods (Business Methods) Part III.D, at 7, available at [hereinafter White Paper]. In order to track, log, and examine all the patent applications filed with the PTO each year, the office groups the patent applications into numerous classes based upon the type of invention the application attempts to claim. See id. Part III.A, at 5. Concurrent with the PTO s shift in policy concerning computer-related business methods, the PTO has established a new category for patent applications, Class 705, which encompasses machines and their corresponding methods for performing data processing or calculation operations... utilized in the... practice, administration, or management of an enterprise. Id. Part III.A, at 5. In layman s

13 2002] BUSINESS METHOD SOFTWARE PATENTS 955 business technologies. 70 More than 2,600 patent applications were filed in Class 705, the classification for computer-implemented business models and their underlying technologies. 71 Although there was strong growth in this area, the 2,600 patent applications accounted for only one percent of the total patent applications for With the influx of patent applications for Class 705, the PTO has granted several patents for computer-based business technologies that some find to be rather questionable patent grants. Commentators have attacked these patents for their apparent lack of nonobviousness or novelty. For example, Patent No. 5,926,796 describes a computerized method for subscribing to magazines at a retail outlet. In one commentator s opinion, the patent lacks the required inventive, nonobvious step. 73 The recent influx of rather suspect patents in the wake of State Street has also led many commentators to debate the wisdom of patenting computer-based business methods. 74 Generally, the commentators question whether the underlying purpose of the patent system warrants granting patent protection to business models. 75 Other commentators question whether the PTO can evaluate new applications effectively with its current examination procedures. 76 In response to many of the concerns and criticisms, the PTO has recently taken steps to improve its examination procedures in an attempt to stop invalid patent applications from receiving unjust patent protection. 77 Generally, the PTO has acknowledged that business method software patent applications have posed problems for its examiners and has implemented plans for better training and new search techniques. 78 Although the PTO has responded to the practical concerns about terms, the class encompasses computer-implemented business models and their underlying technologies. 70. See id. Part III.D, at See id. 72. See id. 73. See Raskind, supra note 5, at See, e.g., Dreyfuss, supra note 5, at 265; Keeley-Domokos, supra note 5, at 165; Raskind, supra note 5, at 64; Thomas, supra note 5, at See discussion infra Part III.B (further discussing the normative values of business method patents). 76. See, e.g., Dreyfuss, supra note 5, at 83; Andy Johnson-Laird, Looking Forward, Legislating Backward?, 4 J. SMALL & EMERGING BUS. L. 95, 120 (2000). 77. See generally White Paper, supra note 69, Part IV.D, at 11 (providing search and library support for patent examiners). 78. See generally id. (specifically recognizing that prior art searches are difficult in this new class of patent applications and thus increasing its professional research staff at its scientific and technical information center in an attempt to facilitate prior art searches).

14 956 SOUTHERN CALIFORNIA LAW REVIEW [Vol. 75:943 examination procedures, the PTO has yet to address most of the normative concerns about patenting business methods. It is unclear what the future will hold for computer-based business methods in America. One may speculate that the improved PTO standards will result in fewer questionable patent grants. Furthermore, the types of computer-implemented business models that the PTO reviews may become more selective. Because [t]he State Street decision seems to indicate that to be patentable, business methods must achieve concrete and material results in addition to being useful, 79 any general operating plan would have to be shown to produce some tangible economic benefit, such as increased productivity or decreased operating costs. This analysis would probably require complex forecasting techniques and rely on economic assumptions and projections. 80 Thus, companies may be hesitant to undertake such a speculative endeavor, preferring instead to patent systems that produce more tangible results. 81 Therefore, it is likely that future patent applic ations will begin to claim very specific functions, such as accounting or order tracking rather than general operating systems. 2. International Effects and Reaction The effects of the State Street decision can be seen outside the boundaries of the United States as well. The European Patent Office ( EPO ) has refused to omit the business method exclusion or the computer program exclusion from its regulations, even in the face of an outcry for legislative change. 82 The Japanese Patent Office also has reacted to the new climate by releasing the final version of the revised Examination Guidelines for Computer-Software-Related Inventions, which clarify the standards for examining computer-based business methods Keeley-Domokos, supra note 5, at Id. 81. See id. 82. The EPO also clarified its stance on computer-implemented business methods: Computer programs that provide technical solutions for technical problems in the operation of a business may be patented, but programs that are of a nontechnical nature may not. See Press Release, European Patent Office, Statement by Dr. Roland Grossenbacher, Chairman of the Administrative Council of the European Patent Organisation (Nov. 29, 2000) [hereinafter Statement by Dr. Roland Grossenbacher], at See Press Release, Japan Patent Office, Revision of the Examination Guidelines for Computer Software-related Inventions (Jan. 2001), at The revisions were made after much public commentary that the JPO had invited through the Internet. See id. The revised guidelines allow examiners to consider computer programs that specify multiple functions to be performed by a computer to be a patentable invention. See id. The new guidelines provide further instructions to the examiners for determining the inventive step when examining business-related computer programs. See id.

15 2002] BUSINESS METHOD SOFTWARE PATENTS 957 The international effects of the State Street decision have been more than just legislative retooling and scholarly debates. Perhaps most importantly, the new patent climate in the United States may have had an impact on American companies business strategies in foreign markets. A recent European study indicates that American companies are filing significantly and proportionately more applications for business methodrelated patents with the EPO as opposed to their European counterparts. 84 Furthermore, anecdotal evidence suggests that some European businesses are aware of the State Street decision and its ramifications but are not inclined to file for protection of their own business methods in the United States. 85 Thus, the State Street decision may have inspired American companies to seek protection abroad in the same manner they sought protection at home in order to gain a significant foothold in the global market. Such a strategy has caused some European commentators to urge European companies to adopt a strategy to deal with what they perceive as the American rush to achieve the First Mover Monopoly. 86 All told, the industrialized nations have felt the ripple effects of the State Street decision. As the United States moves into the future with a more accommodating climate for business method patents, the international community may have to respond to these new developments. In the short term, it seems that the international community will not grant much patent protection to computer-based business methods. What remains to be seen is exactly how the international community will or should react in the long term. 84. MICHAL LIKHOVSKI, MICHAEL SPENCE & MICHAEL MOLINEAUX, OLSWANG AND OXFORD INTELLECTUAL PROPERTY RESEARCH CENTRE, THE FIRST MOVER MONOPOLY: A STUDY ON PATENTING BUSINESS METHODS IN EUROPE (2000), available at EJWPO500.pdf. 85. Id. 86. Id. A British researcher has defined a "first mover monopoly" as a virtual monopoly over a certain product granted through the patent systems to the first inventor to apply for patent protection in a particular country. Id. One European commentator has urged European nationals and policymakers to be wary of the influx of patent applications filed by American companies: It is important that the public, as well as affected industries, monitor developments and enhance their awareness of the issues involved so as to ensure that any debate over the patentability of business methods in Europe is an informed one. Given the approach of United States nationals, Europeans should consider their options carefully, keeping in mind the effect these patents might have on consumer welfare and the freedom of companies to operate in the market. Id.

16 958 SOUTHERN CALIFORNIA LAW REVIEW [Vol. 75:943 III. BUSINESS METHOD PATENTS AND INTERNATIONAL INTELLECTUAL PROPERTY LAWS A. THE INTERNATIONAL INTELLECTUAL PROPERTY TREATY REGIME As a general principle, each community in this world lives by laws set and administered by itself. As transportation and media improve in these communities, however, transactions begin to increase between these distinct communities, and [a]s a result, conflicts tend to arise between the respective laws of these communities. 87 In the field of international intellectual property, treaty regimes govern the conflicts of laws, and domestic courts tend to interpret key legal terms within their own domestic laws so as to be consistent with the treaties in that particular field. 88 Therefore, any analysis of international intellectual property must be viewed in the context of the major governing treaties. The international intellectual property field consists of three core multilateral treaties, each of which the United States is a member. 89 The first two treaties are the Paris 90 and Berne Conventions, 91 which are often cited as the Great Conventions. 92 These two treaties established a worldwide constitutional framework for international intellectual property laws and principles. 93 Taken together, the Paris and Berne Conventions purport to subdivide the international intellectual property system into two hermetically sealed compartments separated by a common line of demarcation. 94 The Berne Convention, completed in 1886 with the most recent revision in 1979, protects the rights of authors in their literary and artistic works through systems of copyrights and neighboring rights. 95 The Paris Convention, which was completed in 1873 and most recently revised in 1967, protects industrial property through regimes such as patents, 87. Paul Edward Geller, International Intellectual Property, Conflicts of Laws and Internet Remedies, 22 EUR. INTELL. P ROP. REV. 125, 125 (2000). 88. See id. at Several other smaller intellectual property treaties do exist; however, they tend to cover more specific areas of intellectual property and have fewer signatory nations. See, e.g., Council Directive 96/9/EC, 1996 O.J. (L 77) Paris Convention for the Protection of Industrial Property, Mar. 20, 1883, as last revised at Stockholm, July 14, 1967 (amended 1979), 21 U.S.T. 1583, 828 U.N.T.S. 305 [hereinafter Paris Convention]. 91. Berne Convention for the Protection of Literary and Artistic Works, Sept. 9, 1886, as last revised at Paris, July 24, 1971 (amended 1979), 828 U.N.T.S. 221 [hereinafter Berne Convention]. 92. Reichman, supra note 62, at See id. 94. Id. at See Berne Convention, supra note 91, art. I, 828 U.N.T.S. at 225.

17 2002] BUSINESS METHOD SOFTWARE PATENTS 959 trademarks, and utility model rights. 96 Currently, the Paris Convention has 163 signatory nations. 97 The third treaty is the Agreement on Trade-Related Aspects of Intellectual Property Rights, 98 commonly known as the TRIPS Agreement, of the World Trade Organization ( WTO ). Ratified in 1995 as nations signed the larger WTO Agreement, TRIPS currently has 144 signatory nations. 99 TRIPS has incorporated the core concepts of the two Great Conventions into its own articles, as well as adding new requirements and protections. 100 The international intellectual property system as embodied by the three major conventions basically desires to reduce distortions and impediments to international trade, while taking into account the need to promote effective and adequate protection of intellectual property rights. 101 The international system also recognizes the need to ensure that measures and procedures to enforce intellectual property rights do not themselves become barriers to legitimate trade. 102 Thus, the international system strives to reach some harmony between the rights of each country to set and administer its own laws and the desire for some sort of uniformity and predictability with regard to each nation s protection of intellectual property. The international treaty regime attempts to fulfill its goals by way of three basic principles. First, the treaties impose the principle of national treatment. 103 National treatment requires that signatory nations provide claimants from foreign treaty nations the same intellectual property rights 96. Paris Convention, supra note 90, art. I, 828 U.N.T.S. at See Paris Convention for the Protection of Industrial Property, Status on February 13, 2002, at (unpublished list of signatory nations). The United States was not an original signatory but joined the convention a few years later in See id. 98. Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, LEGAL INSTRUMENTS RESULTS OF THE URUGUAY ROUND vol. 31, 33 I.L.M. 81 (1994) [hereinafter TRIPS Agreement]. 99. See World Trade Organization, Trading into the Future: Introduction to the WTO, at (last visited Apr. 9, 2002) See TRIPS Agreement arts. II, IX, X Id. pmbl Id See id. art. III; Berne Convention, supra note 91, art. V, 828 U.N.T.S. at 231, 233; Paris Convention, supra note 90, art. II, 21 U.S.T. at 1631, 828 U.N.T.S. at 313. All the treaties have certain requirements that an author or inventor must meet in order to gain the right to national treatment, which the TRIPS Agreement has adopted in whole. See TRIPS Agreement art. III (receipt of national treatment subject to exceptions provided in Paris and Berne Conventions).

18 960 SOUTHERN CALIFORNIA LAW REVIEW [Vol. 75:943 that nationals receive, subject to several eligibility criteria. 104 To supplement the national treatment principle, the treaty regime also provides for a series of minimum rights. 105 Minimum rights set the minimum level of protection and rights that foreign claimants must receive in any treaty nation. Thus, a foreign treaty claimant may assert more extensive rights than the national rights of the protecting country if the treaties provide for greater minimum rights. The second principle imposed by the treaties is independence of rights, which provides that a foreign claimant can claim his or her minimum rights or rights under national treatment in a protecting country independently of his or her rights in other treaty states. 106 Finally, as a general principle, the treaty system attempts to synchronize some of the formal aspects of each country s intellectual property systems. For example, the TRIPS agreement has harmonized the patent terms in signatory nations by requiring the United States to extend its patent term to twenty years from the date of filing. 107 The treaty regime depends on the signatory states to implement the treaties rules in order to fulfill the treaties purposes. 108 Generally, the national approaches to implementing treaties can be separated into two categories. The first and most common approach is called the Monistic approach. In Monist countries, the treaties are incorporated into the municipal law as soon as they are signed by the country or upon some other legislative action by that state. 109 Thus, under the Monistic approach, a foreign claimant may invoke the terms of the treaties directly in the national courts as a source of protection. 110 The second approach is commonly called the Dualist approach. Countries following the Dualist approach require that the domestic laws adopt new provisions to conform 104. See Geller, supra note 87, at 125. Thus, an author who is a U.S. national and who publishes a book in the United States has the right to sue in England under English copyright law to enjoin the infringement of his copyright in England. The criteria of eligibility is spelled out in the respective treaties. Although this criteria provides for an interesting discussion of international intellectual property, this subject is too lengthy and complicated for the purposes of this Note See id See id See MERGES ET AL., supra note 12, at See SAM RICKETSON, THE BERNE CONVENTION FOR THE PROTECTION OF LITERARY AND ARTISTIC WORKS: , at 130 (1986) See id. at See id. Civil law countries most commonly follow the Monistic approach. See id. The United States may be classified as a Monistic country because the Constitution specifically requires that all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land. U.S. CONST. art. VI. Congress, however, often takes it upon itself to incorporate the treaty provisions into the domestic law, thus precluding foreign claimants from invoking the treaty provisions directly as a source of protection in the United States.

19 2002] BUSINESS METHOD SOFTWARE PATENTS 961 to the treaty requirements. Therefore, foreign claimants must assert the national implementation of the treaty provisions rather than rely on the treaty provisions directly. 111 Because each nation s domestic courts and legislatures often have to interpret treaty provisions in order to implement them, standards of protection frequently vary from country to country. In fact, disputes arising under TRIPS often result from varying standards of protection among individual nations. 112 When disputes arise, the Dispute Settlement Understanding under the General Agreement on Tariffs and Trade ( GATT ) applies. 113 The basic system allows a treaty member to bring another treaty member before a third party panel of experts who are members of GATT. 114 The panel renders decisions concerning the protection of one country; however, such decisions are not binding. 115 The panel may only recommend that the infringing nation conform to the terms of the agreement, and it often suggests effective means of implementing its recommendations. 116 If the infringing nation fails to conform to the decision, however, the complaining party may petition the WTO for permission to impose trade sanctions on the infringing nation. B. CAN BUSINESS METHODS FIND PROTECTION ABROAD? In order to obtain patent protection for an invention abroad, an inventor must file for a patent in the country where the inventor wishes to have protection. The Paris Convention provides that member countries must afford full access to their patent filing system to any national of a nonmember country who is domiciled, or who has a real and effective industrial establishment, in a member country. 117 Thus, several questions arise as to how much protection American companies or inventors can receive for their computer-implemented business methods, and what source of law will provide for that protection See RICKETSON, supra note 108, at Most common law nations, as well as the Scandinavian countries, follow the Dualist approach. See id. at See Jennifer A. Mills, Note, Alternative Dispute Resolution in International Intellectual Property Disputes, 11 OHIO ST. J. ON DISP. RESOL. 227, 232 (1996) See TRIPS Agreement art. LXIV See Mills, supra note 112, at 234. The panels are comprised of international jurists and experts and are appointed by the General council acting under the provisions of GATT. See id See id See id See Paris Convention, supra note 90, art. III, 21 U.S.T. at 1631, 828 U.N.T.S. at 313. See also TRIPS Agreement art. XXVII (patents available for inventions that are new, involve an inventive step, and are capable of industrial application).

20 962 SOUTHERN CALIFORNIA LAW REVIEW [Vol. 75: Protection Under Foreign National Law Under the theory of national treatment, an American inventor who attempts to patent a computer-based business method in Europe under each specific country s domestic laws does not receive nearly as much protection as the inventor would have received in the United States. First, patent protection for business method processes does not exist in Europe. 118 Second, the levels of protection for the software that implements the business methods differ so greatly that, in some cases, it is difficult to ascertain the scope of protection that a computer program may receive. American inventors encounter several difficulties in finding patent protection for the overall business methods embodied in their computer programs. First of all, business methods as such are not patentable under the laws of most European nations. 119 Several countries patent laws, such as Germany s, expressly prohibit the patenting of business methods and computer programs. 120 Furthermore, the EPO has recently clarified its position that business methods are not of a technical nature, and therefore cannot receive patent protection as a process under the EPO system. Another obstacle that inventors may encounter may be the initial confusion as to whether their claimed process actually constitutes a business method. Both the statutes and major treatises have eschewed defining business methods, 121 leaving the term a bit fuzzy. 122 The EPO has offered one possible definition by stating that a business method is any subject matter that is more concerned with financial, interpersonal, and societal relationships than with engineering. 123 Thus, some European commentators have created a list of business methods, which include methods of gauging consumer habits, methods of marketing, methods of charging for goods or services, methods of accounting, and methods of inducing customers to buy. 124 Although the EPO s stance helps to clarify the term business method, there still remains substantial wiggle room, so that some processes may find protection, while others will not. For 118. See LIKHOVSKI ET AL., supra note See id See German Patent Law, Part I, 1 (1980), at /19629 (Dec. 16, 1980) See LIKHOVSKI ET AL., supra note In re Schrader, 22 F.3d 290, 298 (Fed. Cir. 1994) (Newman, J., dissenting) (arguing that the business method concept was fuzzy and an unwarranted encumbrance to the definition of statutory subject matter ). See also LIKHOVSKI ET AL., supra note 84 (asserting that the business method concept is notoriously difficult to define ) See LIKHOVSKI ET AL., supra note See id.